Malaysian government meeting

Accounting reforms in public sector: experience from Europe

www.pwc.com

June 13, 2012

PwC

Table of contents

1. Momentum for IPSAS 03

3. Case studies 07

4. Government finance function 19

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Momentum for IPSAS

3

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Modified Cash (20)

Accrual basis

A great diversity is observed in central government reporting practices

Modified Accrual (18)

Accrual basis (26)

Cash basis (27)

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The trend toward accrual accounting is clear

Moving to accrual basis (in 5 yrs)

+32

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Modified Cash (9)

The trend toward accrual accounting is clear

Modified Accrual (13)

Accrual basis (58)

Cash basis (11)

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Case studies

7

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Business case – Accrual conversion in France

The successful challenge of French accounting reform • 2001 Constitutional Bylaw enhances a new accounting system for France based

on accrual accounting in order to make financial information more transparent for the Parliament and the public.

• One of the main changes implied by this reform was to create complementary reporting and financial systems :

• This challenge has been overcome in less than 5 years. The 2012 financial statements received a qualified opinion, with 7 qualifications.

Cash basis accounting

Cash basis accounting

Accrual basis accounting

Cost analysis accounting

Adoption of the Constitutional Bylaw

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Business case – Accrual conversion in France

2003

2006

2007

2008

2005

2014

2001

Vote of LOLF * by the

parliament

Law that reforms the

budget presentation as well

as Central government

accounting. Includes also

statutory audit by NAO

starting 2006

* LOLF: constituional law

Experimentation

Drafting of the new

accounting standards.

Launch of the process

for creating the opening

balance

Acceleration

Preparation to the

statutory audit: new

internal control

framework, procedures,

involvement of internal

audit. Inventory of

assets and liabilities

(buildings, military

equipment,

Provisions,…)

Publication of 1st accrual

financial statements

1st publication in line with the

timeframe. Significant work

on financial communication.

Accounts certified with 13

qualifications

Decision to change

the information

system

Launch of SAP adoption

project for around

30.000 users. Large

scope: all ministries, all

locations, almost all

modules

Statutory audit extended to

public entities

To mitigate one of the

qualification, push on controlled

entities to improve accounting

quality. Statutory audit has

helped keeping the momentum

Statutory audit

extended to

hospitals

2012

Finalization of SAP

implementation

The new accounting

system has been

implemented and 2012

is the first year with

financial statements

coming from SAP.

Implementation process

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Key lessons learned, semantic to be explained

Financial reforms: Several layers

• The financial reform creates different layers of information to manage by civil servants. Each layer has its own rules / Standards / Definitions. All those layers are supported by a common system

Accrual accounting: expenses, Revenues liabilities or assets

Budget : Income and expenditures

Cost accounting: costs

Cash management: cash

SAP (FI, FM, PS, CO, AR, AP, AA, TS,…)

Accounting reform

Pro

gra

mm

es,

mis

sio

ns,

act

ion

s

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Key lessons learned, semantic to be explained

Accrual accounting, one important layer of the reform

• It is critical to use the correct wording (and/or define the correct wording!) to navigate into the future financial system. Not using correct wording can bring be misleading. With the different

concepts, the main impact is the timing of recognition of the events in the different accounting modules.

• For example, acquisition of an equipment

Purchase Order Good / Service

delivered Invoice

Asset or expense

Payment

Potential liability Liability Accrual

accounting

Cost Cost

accounting

Budget consumption

Budget Budget

reservation

Cash disbursement

Cash

Re

co

nc

ilia

tio

n !

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Major issues the ministries had to overcome

• Inventory of land and building which involved all ministries

• Populating new data necessary to proper valuation methods

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Major issues the ministries had to overcome

• Inventory and valuation of all military assets

• Assets under construction: development of fixed assets that have started several years ago. Review by contract performed

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Major issues the ministries had to overcome

• Provisions have grown after the first adoption

• “Present obligation” applies to political decision if they commit the state to expenses

• Off balance sheet information on pensions, guarantees is significant

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Major issues the ministries had to overcome

• Even if not consolidated, public entities and companies controlled by the government are shown as financial assets

• Accounting quality requirements have been extended to controlled entity

• Capacity for those entities to close their books according to government timeline

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Financial communication

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• Bringing the obligation to move to accrual in a law together with the statutory audit of the financial statements

• Gap analysis and milestone plan

• Dedicated team focused on the preparation of the opening balance (i.e. project focused)

• Buy in of the Ministry of Defense. Lot of issues / workload remain in this ministry

• Top – down strategy with improvements that can be achieved after the first set of financial statements

• Communication with National Audit Office

Lessons learned - France

Drivers for success

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• Resistance to change

• Inventory and valuation of buildings

• Inventory and valuation of military assets

• Identification of controlled entities

• Justification of inter-entity operations

• Scope of the provisions (to what extent the government has a present obligation)

• Timing for accruals at year end according to the size of the French Government

• Adaptation of the existing financial systems to accrual

• Audit trail between local systems and financial systems

Lessons learned- France

Difficulties

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Government finance function

19

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Accrual accounting alone provides great view of everything behind you, but you cannot see the traffic ahead

Accrual accounting, yes, but what for?

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IPSAS first adoption pushes governments to focus on compliance. You must think ahead and work on the value added accrual can bring

14

Insight

Insight is at the heart of the vision of the future finance function. It can take the form of performance management, business analytics, corporate information

Efficiency Efficiency in finance means performing tasks in a timely and cost effective manner typically via simplified and standardised processes that leverage technology and consolidation / elimination of non core activities through, for example, shared services .

Compliance and Control The accountability means compliance and improving control being top of the agenda. The finance function needs to optimise risk management, compliance and control to establish a sustainable cost effective control environment.

5

18

18

Insight

Compliance & Control

Efficiency